A Bicycle Shop Struggles to Get a Loan

Charles Kuhn, owner of Kopp's Cycles in Princeton, N.J., says it is America's oldest bicycle store. It opened in 1891.Credit
Laura Pedrick for The New York Times

Kopp’s Cycle has served Princeton, N.J., since 1891. It is, claims the owner, Charles Kuhn, the oldest bicycle store in America. Mr. Kuhn’s father, after working as a salesman for Schwinn, bought the business from the founder’s wife in the 1940s. In the 1950s, Kopp’s earned a reputation for being one of the few bike shops in the United States to stock racing gear by renowned European makers, like Cinelli and Campagnolo.

THE CHALLENGE Obtaining a $1 million loan to refinance the mortgage on the bike store, pay down credit card debt and obtain working capital.

THE BACKGROUND Kopp’s Cycle operates out of a small storefront on a quiet side street in downtown Princeton. Behind the counter is a repair studio that is lined with old wooden bins and is just big enough for three mechanics. Mr. Kuhn still sits at the workbench he used when he was a child working for his father, though the shop has moved several times in the intervening years. In the summer, there is room for two or three mechanics on the porch out back.

Kopp’s moved to its current location in 1989, when Mr. Kuhn and his sister bought the business from their mother. (Mr. Kuhn bought out his sibling’s interest in 1999.) In 2004, he bought the building for $801,000 with an adjustable-rate loan for $775,000, guaranteed by the Small Business Administration. By 2007, though, the rate had risen about three percentage points, to 10.75 percent. Moreover, Mr. Kuhn had grown tired of the paperwork that dogs an S.B.A. borrower. “I just didn’t want to dedicate hours of time putting together annual statements for them,” he said.

So Mr. Kuhn refinanced with Washington Mutual (“I sent them a copy of our tax return, and that’s all they wanted,” he said), signing on to a seven-year loan for $825,000, with interest fixed at 6.18 percent.

The loan is amortized on a 25-year schedule, however, so when it comes due in fall 2014, Mr. Kuhn will have to make a balloon payment of $775,000. (Balloon payments, typically refinanced at term’s end, are common in commercial real estate loans.) At the time of the loan, the store and its lot, the loan’s collateral, were appraised at $1.3 million.

In the intervening years, Kopp’s business has been battered. The effects of the recession have been intensified by online competition. Mr. Kuhn started noticing customers coming in with products bought elsewhere that they had browsed in his store.

“People come in with their smartphone and scan a bar code on a product that I have in my showroom, and what comes up on the phone is the three closest places and their price and then also what it is on Amazon,” he said. Revenue fell from a high of $485,000 in 2008 to $393,000 the next year. Mr. Kuhn kept himself afloat by borrowing on his credit card, mostly for personal expenses but also to buy inventory.

To rebuild sales, Mr. Kuhn cut prices on accessories, which — typical for a bike store — have provided most of his profits, Mr. Kuhn said. This lifted revenue to $473,000 in 2010, but profits fell sharply — Mr. Kuhn said his margin was just 1 percent last year, compared with 10 or 15 percent in 2008.

This has not greatly concerned him, he said: “When I get the books done at the end of the year, if I break even — if I don’t show any loss, and I show a little profit — as long as my guys are getting paid, all my bills are getting paid, and I’m getting paid, then I’m O.K.”

Mr. Kuhn adjusts his salary as necessary to keep the profit small. Also, he and his wife personally own the building and rent it to the store at a rate that exceeds their mortgage payment.

But the 12 percent interest rate on $100,000 of credit card debt has grated on him, as did the prospect of the balloon payment now three and a half years away. The solution, as he saw it, was a new 25-year loan that would consolidate the credit card debt with the $800,000 outstanding on the property and add $100,000 for working capital. He anticipated that the property’s value had risen to $1.5 million, enough to support a $1 million loan.

THE OPTIONS Mr. Kuhn began approaching banks last fall. His own bank, Wachovia, wanted a debt-service coverage ratio — a formula to determine whether a borrower could meet debt obligations that divides these into cash flow — from 1.1 to 1.5. Kopp’s Cycle could not pass that test. A loan officer at a second national institution, PNC Bank, also cited a poor coverage ratio and “declining trends.” A banker at a local institution did not return follow-up calls.

Next, Mr. Kuhn turned to a loan broker, paying him $1,000 upfront plus a promised 10 percent of the amount of the loan if approved. The broker put Mr. Kuhn in touch with Monument Bank, of Doylestown, Pa., which seemed a promising lead. But the bank’s appraiser concluded that the real estate was worth less than $1 million — not enough to serve as collateral for a million-dollar loan. The appraiser, he said, simply chose the midpoint between $300,000 and $1.7 million, the price at which other buildings in the area had sold. “There are just not a lot of places to compare it to,” Mr. Kuhn said.

In late February, Mr. Kuhn was considering turning to yet another bank, with another appraiser who might use different methods, but he did not want to pay for a second evaluation. He was also watching a property across the street from the shop that was for sale. “The deal may close at $1.6 million, which would bode well for me,” he said. “I know in my heart that if I put an ad in the paper that this property is for sale for $1.5 million, I know I would sell it.”

Mr. Kuhn did not view a loan as essential to Kopp’s survival. But he did worry about losing a longstanding safety net. “I’ve always had a place where I could go if I needed any kind of money to do anything I want,” he said. “I’ve always had that cushion; I’ve always had that comfort, and at this point, I don’t have that comfort. I’m very uncomfortable.”

WHAT OTHERS SAY Marc S. Sovelove, senior vice president for lending at Financial Resources Federal Credit Union in Bridgewater, N.J.: “The $1 million loan request appears to be risky for any lender to do: the company’s cash flow, collateral, industry trends, leverage, liquidity and profitability are all suspect. Mr. Kuhn’s statement about showing a little profit may be acceptable to Mr. Kuhn, but it will not be to a lender.”

Barry Sloane, president and chief executive of Newtek Business Services, a small-business lender and back-office service provider based in New York: “Washington Mutual was the devil — an undisciplined lender providing finance to an undisciplined borrower. Washington Mutual made this borrower feel great in the beginning, but it’s been taken over by the F.D.I.C. and JPMorgan, and he hasn’t amortized his loan in four years.”

Jay Townley, a bicycle store consultant based in Lyndon Station, Wis.: “I would suggest that Mr. Kuhn focus on the things he can actually do something about for obtaining a $1 million loan, such as developing a three-year business plan for Kopp’s Cycle.”

THE RESULTS Offer your thoughts on Mr. Kuhn’s predicament on the You’re the Boss blog at nytimes.com/boss. Next week, on the blog and in this space, we will explain how things have worked out at Kopp’s.

A version of this article appears in print on June 2, 2011, on page B5 of the New York edition with the headline: A Bicycle Shop Struggles to Get a Loan. Order Reprints|Today's Paper|Subscribe